Fund of funds (FoF) investments have become increasingly popular over the years. Companies and organizations that assume financial responsibility for individuals and groups, such as plan sponsors and advisers, use FoF investments to diversify risk. FoF investments hold a portfolio of other investment funds rather than investing directly in stocks, bonds, or other securities. One type of FoF investment that has garnered increased interest by plan sponsors, advisors, as well as individuals, is a target date fund (TDF). A TDF is a type of mutual fund structured by an entity (e.g., investment firm, mutual fund company, insurance company, and the like.) that automatically rebalances its portfolio to a more conservative asset allocation as a specific date target approaches (e.g., a retirement date).
Entities typically create TDFs in a series, each TDF of the series having a different target date and portfolio mix selected from other funds provided by the entity. In addition, each TDF of the series shares a common glide path, which is a formula that describes how portfolio allocations for each TDF change over time.
While TDFs can improve overall investment and retirement planning, there is an increased need among plan sponsors, advisors, and investors for independent analysis and ratings of TDF series. As each TDF of a series shares the same glide path, there is a need to objectively quantify the risk associated with performance of these funds over the glide path to ensure consistency with investment objectives.
Further, there is a need to understand the risk levels of a series of target date funds on a relative basis, as the glide paths of TDFs having same target dates can vary greatly between investment firms. For example, some entities assume that participants desire a high degree of safety and liquidity, and therefore include more fixed income securities than other asset classes in their TDFs, while other entities assume that participants will hold onto the TDFs, and therefore include more equity securities in their TDFs, reflecting more potential for both risk and reward along a longer time horizon.
Accordingly, there is a need for improved systems and techniques for analyzing and comparing fund of funds investments.